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Predicting the Equity Premium with Combination Forecasts: A Reappraisal

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  • Sebastian Denk
  • Gunter Löffler

Abstract

This paper reappraises the usefulness of combining individual forecasts for predicting the U.S. equity premium. For comparison, we also consider penalized regression and dimension reduction approaches. We fail to find evidence of predictive ability in recent decades, regardless of the forecasting method used. Further analysis shows that an increase in the correlation of individual forecast errors is an important factor in the declining performance of combination forecasts.

Suggested Citation

  • Sebastian Denk & Gunter Löffler, 2024. "Predicting the Equity Premium with Combination Forecasts: A Reappraisal," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 14(4), pages 545-577.
    • Handle: RePEc:oup:rasset:v:14:y:2024:i:4:p:545-577.
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    File URL: http://hdl.handle.net/10.1093/rapstu/raae009
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    More about this item

    Keywords

    C53; G12; G17;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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